Real estate professionals and investors will inevitably encounter situations where selling a property becomes necessary. The classification and accounting treatment can significantly impact their financial statements. ASC 360, under US GAAP, requires that long-lived assets be classified as held for sale in the period in which all of the held-for-sale criteria are met. Once all held-for-sale criteria are met, the asset group undergoes a shift in accounting treatment; most notably, depreciation ceases, and the asset group must be measured at the lower of its carrying amount or its fair value less costs to sell.
Held-for-sale accounting is required when all six criteria below are met. All criteria must be met at or before the balance sheet date for a long-lived asset to qualify as held for sale.
- Management Commitment to a Plan to Sell: Management must have the authority and intent to sell the asset, supported by a formal plan of sale. The plan should specifically identify all major assets to be disposed of, including the actions required to complete the plan and the expected completion date.
- Availability for Immediate Sale in Present Condition: The asset must be available for immediate sale in its current condition.
- Active Program to Locate a Buyer: Management must have an active program to locate a buyer, such as marketing the property. A buyer does not need to be identified.
- Sale is Probable Within One Year: The sale is probable, and transfer of the asset is expected to be completed within one year of classification.
- Reasonable Pricing: The asset must be marketed at a price that is reasonable relative to its current fair value, which indicates whether the entity has the intent and ability to sell the asset. A market price that is reasonable relative to its current fair value indicates that the asset is available for immediate sale. In contrast, a market price above fair value indicates that the assets are not available for immediate sale and that the seller may simply be testing the market.
- Commitment to the Plan: The actions taken should demonstrate that it is unlikely the plan will be significantly modified or withdrawn.
If the criteria to classify a long-lived asset as held for sale are met after the balance sheet date but before the financial statement issuance date, the long-lived asset should continue to be classified as held and used in those financial statements. All six criteria must be met prior to the balance sheet date for the asset to be held for sale as of that date.
Once the criteria are met, depreciation and amortization should cease for the long-lived assets in the disposal group. The long-lived assets in the disposal group should be recorded at the lower of their carrying value and fair value less cost to sell. A loss should be recognized for any write-down to fair value less cost to sell. A gain should be recognized for any subsequent increase in fair value, less cost to sell, but not more than the cumulative loss previously recognized.
The asset group classified as held for sale should be presented separately on the balance sheet. The assets and liabilities of the disposal group classified as held for sale should be presented separately in the asset and liability sections and should not be offset and presented as a single amount. The major classes of assets and liabilities classified as held for sale should be presented on the face of the balance sheet or disclosed in the notes to the financial statements. An entity with a component that meets the held-for-sale criteria should also consider whether the component meets the criteria for discontinued operations reporting. An entity may qualify for held-for-sale accounting but not discontinued operations accounting.
Understanding held-for-sale accounting is essential for anyone involved in financial reporting or business decision-making. It ensures that assets intended for disposal are presented accurately, thereby enhancing transparency.
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